MV Majesty: Section 68 Arbitration Act 1996 – Arbitrator Refuses to Admit Accounting / Arithmetical Error

In Ducat Maritime Ltd v Lavender Shipmanagement Incorporated [2022] EWHC 766 (Comm), Butcher J set aside part of an award in an LMAA SCP arbitration under s. 68 of the Arbitration Act 1996, on the grounds that the arbitrator breached his general duty of fairness. The judgment provides clarification of what is to happen in the situation where the arbitrator makes an obvious accounting / arithmetical mistake but refuses a s. 57 application to correct that error. 

The initial Award arose from a dispute under a time charterparty of the MV Majesty. Owners (Lavender Shipmanagement) commenced arbitration under the LMAA Small Claims Procedure, claiming USD 37,831 in unpaid hire. Charterers (Ducat Maritime Ltd) denied this by way of set off and counterclaim, including seeking to deduct USD 15,070 for underperformance. The Arbitrator found largely in favour of Owners, but in seeking to reconcile the figures presented by the parties in his Award, he wrongly added the Charterers’ unsuccessful counterclaim (USD 15,070) to the amount claimed by Owners before deducting the amounts on which Charterers succeeded. This resulted in the arbitrator awarding Owners USD 9,553.92 more than he should, having recognized that he could not award Owners more than they had claimed in the reference. Charterers made two unsuccessful applications to the arbitrator under s.57 of the 1996 Act to correct the Award, before issuing an application under s. 68 to have part of the Award set aside. 

Charterers argued that there was an irregularity according to s.68(2)(a) – failure of the tribunal to comply with its s.33 duties - on two alternative grounds: Firstly, that the arbitrator reached a conclusion that was contrary to the common position of the parties, without providing an opportunity for the parties to address him on the issue; Secondly, that he had made an obvious accounting mistake.

Butcher J ruled in Charterers’ favour on the first ground, reasoning that the parties had been in agreement that the Charterers’ counterclaim did not form part of the Owners’ claim and that the parties had not been given the opportunity to address the point as it was not in “the arena”. The judge referenced the fact that the arbitrator realised there “seemed to be a problem” by limiting the amount awarded to the amount claimed when his calculations would have resulted in a greater sum being due to the Owners. He said “I consider that, when he realised that the amount he thought was due to Owners was more than the amount they had claimed, and that this was unexplained, he should not have proceeded to resolve the problem as he did, without giving the parties the opportunity of commenting on it.” 

The judge’s findings on the second argument were obiter but worthy of note. Whilst accepting that illogicality or inadequacy of a tribunal’s reasoning does not bring the matter within s.68, which is focused on due process, he held that a gross and obvious accounting mistake or arithmetical error may constitute a failure to conduct proceedings fairly “because it constitutes a departure from the cases of both sides, without the parties having had an opportunity of addressing it”.  He continued “…neither party’s case is likely to have included the mistake as a basis for the result arrived at, and, in making the error, the tribunal is likely to have departed from common ground between the parties as to how arithmetical processes work, or whether items in an account are credits or debits, and to have done so without giving the parties an opportunity of addressing the justifiability of the departure.” The judge concluded that “If a “glaringly obvious error” in the award, to use Merkin and Flannery’s phrase, can be said to arise in this way, section 68 can probably be regarded as applicable, without subverting its focus on process”.

As to the requirement of “substantial injustice” under s.68, Butcher J found this to be satisfied stating:

 “I recognise that the sum involved is, by the standards of many commercial disputes, small.  Nevertheless, it must be viewed in the context of the total amount of the Owners’ claim, over which the parties considered it appropriate to arbitrate, which was US$37,831.83.  I regard it as substantially unjust that a party should, by reason of an error such as that made by the Arbitrator here, be ordered to pay about 33% more than was due by way of principal, and be ordered to pay interest on its own unsuccessful counterclaim.

I regard that as going well beyond what could reasonably be expected as an ordinary incident of arbitration, even SCP arbitration.”. 

It therefore seems that in assessing substantial injustice the court may look to the financial consequence in comparison to the amount claimed, even if both are extremely small in comparison to the total amounts payable under the relevant contract.  

Article Authors: 

Andrew Patrinos (Partner) and Tomos Holmes Davies (Paralegal)

William Jackson joins Partnership

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William is experienced in handling a wide range of shipping issues from general charterparty and bill of lading issues to collisions, groundings, hull and machinery and unsafe port claims as well as commodity disputes.

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War Risk Clauses and the Conflict in Ukraine

The invasion of Ukraine by the Russian Federation has triggered the largest conventional war in Europe since 1945, disrupting the lives of millions (BBC (2022) ‘Why is Russia Invading Ukraine and What Does Putin Want?’). It goes without saying that there have been wide-reaching effects on international trade. Since the start of Russia’s so-called ‘special operations’ in the country, the Ukrainian government has closed its ports to commercial shipping. It is understandable that ship owners in the Sea of Azov and the Black Seas will be questioning whether the Charterparty they have entered into can be cancelled due to War Risks. In light of this, we examine the relevance of the War Risk Clause for Voyage Chartering (VOYWAR) 2013 and the War Risk Clause for Time Chartering (CONWARTIME) 2013, as parties attempt to protect their interests and ensure the safety of their Vessels, cargoes, and crew. 

Background

For merchant vessels in the 17th and 18th centuries, war risks were generally categorized as ‘perils of the seas’ on a standard policy, or S.G. Form (Michael Miller (1990), Marine War Risks (Lloyd’s of London Press Ltd, London) at p.3.). In the following two centuries, they were recognized as a threat that had to be distinctly accounted for. On the eve of the Second World War, the Baltic Conference War Risks Clause for Voyage Charters 1938 stipulated that parties could declare the contract of carriage terminated if the navigation of the vessel was endangered by ‘war, hostilities, warlike operations, civil war or revolution’ (Baltic Conference War Risks Clause for Voyage Charterers 1938 (Code Name: “Baltwar”) at s.1(a)). In the post-war period, the Baltic Conference Aggravation of Hostilities Clause 1946 offered provisions for parties to cancel the charter in the event of war or warlike operations ‘being substantially aggravated’ (Baltic Conference Aggravation of Hostilities Clause 1946). In 1993 the Baltic and International Maritime Council (BIMCO) produced the first configurations of VOYWAR and CONWARTIME. The most recent manifestations of these Clauses appeared in 2013, and these are examined below in the context of the conflict in Ukraine. 

Ukraine is a major contributor to global trade and international shipping. Formerly known as the breadbasket of the Soviet Union, it was ranked the world’s second largest exporter of grain in 2021, and there are typically high levels of marine traffic around its ports. On 15th February the Joint War Committee designated the Sea of Azov and the Black Sea as ‘listed areas’, as tensions with Russia mounted. With the Russian invasion now fully underway, there is a far greater possibility of the BIMCO War Risk clauses being invoked by Shipowners operating in these areas, with a view to preserving the safety of their Vessel, cargo and crew. This may create the potential for disputes to arise. 

VOYWAR 2013 

The VOYWAR 2013 Clause provides that if loading has not yet commenced, and the Master or Owners reasonably believe that the performance of the Contract of Carriage will expose the Vessel, cargo or crew to war risks, they may give notice of cancellation of the Charterparty, or refuse to perform such part of it that they reasonably believe will expose the Vessel, cargo or crew to War Risks. If the Contract of Carriage stipulates that loading and discharging of cargo is to take place at a range of ports, and the port nominated by the Charterers exposes the Vessel, cargo or crew to War Risks, then the Owners shall require the Charterers to nominate a safe alternative port, which lies within that range for loading and discharging. They may cancel the Contract of Carriage if the charterers do not nominate an alternative safe port within forty-eight hours of receipt of the notice of this requirement. It is also important to understand how War Risks are defined within the Clause. It states: 

(ii) ‘“War Risks” shall include any actual, threatened or reported: 

War, act of war, civil war or hostilities; revolution; rebellion; civil commotion; warlike operations; laying of mines; acts of piracy and/or violent robbery and/or capture or seizure (hereinafter “Piracy”); acts of terrorists; acts of hostility or malicious damage; blockades (whether imposed against all vessels or imposed selectively against vessels or certain flags or ownership, or against certain cargoes or crews or otherwise howsoever)…’ (BIMCO, Standard War Risks Clauses for Voyage Chartering, 2013).

The Clause also stipulates that the Owners will ‘not be required to continue to load cargo for any voyage, or to sign bills of lading, waybills or other documents evidencing contracts of carriage for any port or place’, if, in the reasonable judgment of the Master and/or Owners, the Vessel, cargo and crew may be exposed to War Risks. Once again, if it should appear that this is the case, the Owners may by notice request that the Charterers nominate a safe port for the discharge of the cargo. If within forty-eight hours the Charterers have not done this, the Owners may elect to discharge the cargo at a safe port of their choosing. They will be entitled to recover extra expenses of this discharge and receive the full freight as if the cargo had been taken to the discharging port, and if this additional distance exceeds one hundred miles, to additional freight ‘which shall be the same percentage of the freight contracted for as the percentage which the extra distance represents to the distance of the normal and customary route’.

CONWARTIME 2013

According to CONWARTIME 2013, War Risks are defined in the same way as by VOYWAR 2013. In section (b), the Clause stipulates: 

‘The Vessel shall not be obliged to proceed or required to continue to or through any port, place, area or zone, or any waterway or canal (hereinafter “Area”) where it appears that the Vessel, cargo, crew, or other persons aboard the Vessel, in the reasonable judgment of the Master and/or the Owners, may be exposed to War Risks whether such risk existed at the time of entering into this Charter Party or occurred thereafter’ (BIMCO War Risk Clause for Time Chartering 2013).

It then provides: 

‘Should the Vessel be within any such place as aforesaid, which only becomes dangerous, or may become dangerous, after entry into it, the Vessel shall be at liberty to leave it.’

Furthermore, section (c) states that a Vessel will not be required to ‘load contraband cargo’, or ‘pass through any blockade as set out in Sub-Clause (a), or proceed to an Area where it may be subject to search and/or confiscation by a belligerent.’

Considerations If Clauses Are Invoked

There are various issues to consider if these Clauses are invoked and disputes arise. Of course, it is understandable that Owners may elect not to call at certain ports if there is a high probability that, in their reasonable judgment, they will be exposed to War Risks. However, the threshold for invoking the clauses is high. They cannot be relied upon simply because of the existence of a state of war, where the Vessel is not affected. It is likely the Owners would only be able to invoke the clause if there was danger present in the specific area the Vessel was scheduled to call at or to pass through. The Triton Lark [2012] established that Owners and Masters must account for quantitative (the degree of likelihood that a peril will occur) and qualitative factors (the seriousness of the potential consequences for a Vessel and the crew) when assessing the level of risk (Pacific Basin IHX Limited v Bulkhandling Handymax AS (the “Triton Lark”) (2012)). For example, Russian land operations in Ukraine, taking place far away from a Vessel sailing in the Black Sea, would be unlikely to establish sufficient qualitative danger for an Owner to invoke the clause, but an intensification of naval operations and the possibility of cargo ships being adversely affected, as a recent case demonstrated, would be far more likely to do so. It may then be safely said that the Charterers would not be entirely at the mercy of the Owners’ refusal.  

Charterers will likely have to be on their guard that the Owners do not invoke the clauses hastily or incorrectly, disrupting the course of business. There are a number of measures that Charterers might consider, in order to protect voyages to Ukrainian ports. These may include proposing specific wording in the Charterparty that might exempt the named port from the War Risk Clause or simply providing for the Charterers agreement to the Owners’ refusal to call at the port after the formation of the contract. Additional amendments might also be considered by the Charterers, such as the forty-eight-hour limit within which to nominate an alternative, safe port.

As for CONWARTIME 2013, Owners may be prepared to invoke this Clause with a heavy reliance on section (c), which stipulates that Owners will not be required to proceed to an area where they may be ‘subjected to search and/or confiscation by the belligerent.’ Following the recent seizure by the French navy of a Russian cargo ship bound by US sanctions, it has yet to be seen whether Russia will retaliate by seizing Vessels of NATO member states and subjecting them to lengthy searches. 

As the crisis in Ukraine develops, parties will have to consider these issues so that they are equipped to allow business to proceed as smoothly as possible in the circumstances and the safety of the Vessel, cargo and crew is assured. As a brief analytical overview, this article does not intend to serve as legal advice. If any assistance is required on an individual matter, please contact the office for further information. 

Article Authors:
Monty Birley (Assistant Solicitor) and Tomos Holmes Davies (Paralegal)